Roger J Kerr says it's not the retailer-generators causing power price inflation, it's the Govt-owned grid and highly regulated lines companies

Roger J Kerr says it's not the retailer-generators causing power price inflation, it's the Govt-owned grid and highly regulated lines companies

 By Roger J Kerr

Political event risk came sharply into focus for the local debt market last week with Infratil temporarily pulling their bond issue from the market due to the new risks and uncertainties for the electricity sector following the Labour/Green policy announcement.

Infrastructure and utility investment company, Infratil owns 51% of listed electricity generator and retailer TrustPower.

It was the sensible and prudent thing to do with well-respected Infratil executive Tim Brown knowing more than most about risk, having stepped in front of one of his own Wellington buses last year.

Infratil will still raise their money; however the policy shift from the opposition political parties will have implications for interest rates in the medium term through the NZ bond premium over US bonds, SOE and corporate debt pricing and general uncertainty on what such potential Government interference in the economy means for other industries, investment and credit ratings.

Under the potential scenario of a change of Government next year to a Labour/Green coalition, this massive step to the left for New Zealand’s economic policy will cause foreign investors taking their gains on their current holdings of NZ Government Bonds, the resultant selling causing long-term interest rates to increase.

While the Labour/Green politicians see the policy as buying votes as everyone likes the idea of lower household electricity bills, not many would have thought the policy through as likely to send their mortgage interest costs and rents higher.

While rising consumer electricity prices have been a consistent positive contributor to annual inflation increases over the last decade, only a small part of the price increases relate to higher wholesale electricity prices being passed through to the consumer by the electricity generator/retail companies.

The majority of the price increase are from the Government-owned, monopoly national grid network provider Transpower and the highly regulated regional electricity network companies (Vector, Powerco and Orion). Transpower underinvested in network upgrades in the 1990’s and the catch-up over the last 10 years has been expensive.

True competition in the retail electricity market has been hard to achieve due to the network constraints, however eliminating competition altogether hardly seems the right choice for consumers.

Prices may be temporarily regulated lower by having a single generation provider; however the removal of price signals for future investment will ultimately lead to electricity brown and black outs as many other countries have found out. 


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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at

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Not a good article.  And introduces some emotional red herrings that are manipulative rather than inform.  eg.  Your mortgage rate will go up.  Foreign investors will see it as see it as a step to the left etc.     Really !
Maybe foreign investors will see it as a good thing for the New Zealand economy.

Par for Roger....  Lets look at what Bradford's reforms did, oh wait dropped prices for a little bit and then up they went a lot.
He is substantially right on the transmissions costs, however these should drop back once the investment is done....of course I bet they wont.
Mortgage rate go up? yeah right far fetched as usual....
PS when did the transmission upgrades being due to be dine under best practice? ie did they pre-date even HC's 3 terms?  So Bolger & Shipley?

"The "Glide Path"
In 1997, Transpower adopted a strategy known internally as “the glide path”, and minimised spending on the grid and renewing assets."
"The 45th New Zealand Parliament continued. Government was The National Party, led by Jim Bolger...
"reforms to the retail sector of the electricity industry in 1998"
Even WP can take some stick,
""With power prices going through the roof, why are we not amalgamating the power companies created during the mindless National Party reforms?""
Seems few are without blame.......

Maybe should examine how well Roger's predictions have been for the last 4 years.....

Could Roger prehaps go into a little more detail on the specific's of how forming a single purchaser in the electrical supply market in New Zealand (in a manner similar to other jurisdictions) is going to affect the interaction of global flows of capital and money supply forming interest rates and thus mortgages? Becuase it seems to me issues like countries central bank policies and the NZ dollar have several orders of magnitude more significance than this possible effect. But I welcome a detailed, testable explanation of how the NZ electrical supply market will have such an influence on the global economy.

"this massive step to the left for New Zealand’s economic policy"
"Massive step to the left"      get a grip Rodger.
This sort of over  egging the situation, adds nothing to the debate, infact it diminishes any Gravatis that Rodgers' other articles may have had.

life imitating art
massive step = jump.....
all we need do is up date the character names......


It's just a jump to the left


And then a step to the right

Riff Raff

It's astounding
Time is fleeting
Madness takes its toll
But listen closely


Not for very much longer

Riff Raff

I've got to keep control
I remember doing the Time Warp
Drinking those moments when
The blackness would hit me

Riff and Magenta

And the void would be calling


Let's do the Time Warp again
Let's do the Time Warp again


Bigger picture fellow peasants...are we not being given a looksee into the socialist gameplan...let's assume they are not lying about their electricity plans..yes I know but just this once ok...the bigger picture now!...what else do these economic fools intend to do to buy votes and a cell in the Beehive?

Some of the comment around the Labour/ Green policy has been a bit staggering. Forming a Government owned entity to compulsorily acquire all the electricity generated and enforce sales to consumers at a lower price has to be a left wing policy option and we have not seen anything like this for a couple of generations.It can be argued that it is a good idea ( not that I think it is ) but it cannot be denied it is left wing. That is how things are done in Cuba. The policy presupposes central planning of electricity generation and demand control. Sounds like a blast from the past to me.
Noone can know what the impact of the policy on mortgage rates will be as there will be bigger forces than this at work. It will though make foreigners more wary about investing here and probably about lending to us. This is a major policy shift for New Zealand if it comes to pass and will give rise to a greater degree of political risk attaching to New Zealand which will require a greater risk premium. Ask Trustpower and Contact Shareholders and potential Infratil bond holders about that. It could easily impact on borrowing costs for our banks.
If a Labour /Greens government thinks this is a good idea in Electricity why wont they think it is a good idea to do something similar in other areas?

It is not quite how it is done in Cuba, where all the generation is at least part owned by the state, so factually speaking it would be more accurate to say it is the way it is done in places like California.
That said, even in Cuba foreign companies are willing to invest in power generation.
Yes, it is a left-wing policy, and should be discussed on that basis, but in international terms or long term New Zealand history it is not a highly radical left wing policy. It is not like the government is nationalizing anything. Inaccurate comparisons and cries of "North Korea" from politicians on the right just look silly.

Under the potential scenario of a change of Government next year to a Labour/Green coalition, this massive step to the left for New Zealand’s economic policy will cause foreign investors taking their gains on their current holdings of NZ Government Bonds, the resultant selling causing long-term interest rates to increase.
Mark the calender for the most recent close (29/04/13) of the NZ government 23's: it was 3.18% according to NZX following a previous Friday tender yield of 3.2105%.  The buyers seem to have been crushed trying to get through the doors following the strong US T10 Friday night close.
Don't you just get sick of the Neo cons/liberal scaremongering. As a seasoned market professional I have never let politics get in the way of a positive carry curve. Especially when the Fed and now the BOJO are buying. 

Going by the logic of the article, Roger should have to conclude international markets approve of the Labour/ Greens policy.
But, yes, the international markets do not care is the correct answer.

What did they say? A saving of $300 per yr / $6 per week how that is going to sway any voter is beyond me!  Is this really going to make THE difference for NZ households??
Again we have a situation where all consumers are to benefit when there are better more productive ways to target those who really do need to have this .86c cent daily saving.
Lets see some real policy that will increase the affluence of this nation, our natural resources comes to mind.  

Exactly Billionaire - notice how the focus is placed on the higher figure rather than the weekly or daily amount.
The L/G think they can regulate and tax their way to prosperity and all this does is make everyone poorer.  This whole policy is nothing more than vote buying rubbish.

The L/G think they can regulate and tax their way to prosperity and all this does is make everyone poorer.
In principle you are not wrong.
Can someone tell Key to keep his crony capitalism ideology away from internet wholesale pricing. Read article
Chorus is pulling out all the stops to prevent the Commerce Commission from slashing the price it can charge for copper-based broadband.
It said it would ask the commission to first work out the actual cost of providing those services - a potentially huge undertaking.
The commission issued a draft determination in November that recommended cutting the price Chorus should be allowed to charge for wholesale copper broadband connections by $12.53 a month to $8.93 from December 2014. It had been due to finalise that determination in June.
Chorus has estimated the price drop would cut up to $160 million off its annual earnings before interest, tax, depreciation and amortisation.
Prime Minister John Key signalled that he might be prepared to intervene in November after describing the commission’s draft determination as ‘‘very problematic’’.

Well if you are a billionare then yes you clearly have no idea how hard it is for the poor, $6 it seems is a lot.
We have had attempts for 3 decades to improve the well being of our nation and instead the top 1% have taken all of the productivity gains of those years and the bottom 20% would even seem to be worse off.
In terms of natural resources, what pray do our chidren do when those are used up? Look at the UK, their oil (going) and coal is gone.  All you want to do is try yet more pumping? yeah right.

Steven - It takes sod all imagination to increase one's income. It is attitude that holds people back from earning more. Expectation that society owes them something more or the just plain old ignorance that it is the Governments job to provide for them.
You would be better off asking how the 1% made money.  We all have the ability to make money at anytime. Don't you ever read anything on psychology?
I came across a middle aged female who is very hard up but she is excellent at something and could easily turn it into a business. When I suggested she set up business she fell apart. I will have to pay ACC and all those taxes and obligation etc. I told her that she could hire people to do that side of things for her. I could see the panic stricken look in her face and decided to change the subject. I do however think it is sad that people get put off following something they are not only good at but enjoy because of the bureaucracy thats involved. This person is genuinely terrified of the authorities if she made an error.  What the hell sort of a country do we live in that we strangle entrepreneural activity so much that some people actually become paralysed by fear?

We are told elsewhere that the Thatcher government in the UK did something not unlike the L/G proposal.
The central reason for regulating the New Zealand industry would have been to hold prices and asset values down to the lowest levels consistent with security of supply.
One example of such regulation was introduced by Margaret Thatcher’s government when it privatised electricity and other utilities in the mid-1980s.
So Margaret Thatcher was Socialist of the worst kind. One of those closet red-under-the-bed types, I guess.
We had one noisy Roger Kerr in this country some time back and he became a laughing stock for his outrageously silly views.

Becuase we are approaching Thatcher's policies from the right-hand side they are like communist North Korea. If we were approaching them from the left hand side they would be described as critical to save the nation.

Are you seriously suggesting Margaret Thatcher would have been any part of setting up a Government Agency to compulsorily purchase all of the supply of a commodity from local producers at a price determined by the Government and then controlling the retail price of the commodity?
I dont know what regulations the Tories put in place to control recently privatised entities but i bet they never came up with one like this.

I  really do not care how the control was  imposed, the fact is that a supposed right wing ideologue and poster girl of that clique was responsible for exercising control in a left wing way.
All bets are off on the way politicians of whatever hue exercise their will upon the public. Sneaking changes on the people is very much the way in which governments work and I would suggest the right is very competent even more so than their opponents. Spin is king and it is particularly rife with our present regime.

So....   you dont see any difference between socialising the means of production and distribution via a centrally planned and controlled agency and having some regulatory control of a market place?

Stick to giving fixed interest advice Roger. At least there you have a 50/50 chance of being right,